Case M80
Members: HP Stevens ChCF Fairleigh QC
JR Harrowell M
Tribunal:
No. 1 Board of Review
C.F. Fairleigh Q.C. (Member)
The income return of a partnership (with 20 members) for the year ended 30 June 1977 stated a loss of $999,031. On 30 March 1978 this was adjusted by the Commissioner on the basis that expenditure of $1,468,059 was considered by him to be incurred in relation to the gaining or production of exempt income viz. portion of the purchase price of (i) 270 shares in one proprietary company, and (ii) 50,000 shares in a second proprietary company. The result was a taxable income of $469,028 which was distributable between the partners, 14 persons and six incorporated companies. (The evidence did not disclose in what sense the words ``exempt income'' were used, but see para. 9(a)(i) and (ii) hereof.)
2. (a) On 25 May 1978 the Commissioner made a further adjustment thereto and the notations on the adjustment sheet are these:
``Adjusted net income of $469,028, as previously advised, has been reduced to NIL
Pursuant to Section 26AAA, the profits arising from the sale of shares in the companies listed below have been included in assessable income
(The first company aforesaid) 1,750 (The second company aforesaid) 2,899 ----- 4,649 -----This basis of assessment will be reviewed if and when it is established that the facts are within the ambit of the `Curran' decision. (That is to say, Curran v. F.C. of T. 74 ATC 4296; (1973) 131 C.L.R. 409; 5 A.T.R. 61.)''
(b) It is demonstrably wrong to say that the adjusted net income was reduced to nil. The fact is that the basis first adopted for computation of the net income of the partnership (as a step in arriving at the amount of money to be distributively included in the assessable income of the several partners) was abandoned and a different basis was used, whereupon the partnership's net income was found to be $4,649.
(c) The notation on that document (by application of the maxim
ut res magis valeat quam pereat
) is not to be understood as meaning that there has now been a tentative computation of net income (resulting in three impermissible provisional assessments as in para. 4(b) hereof); rather, that is an indication (i) that the computation (so also any assessment importing the computation) has been made on such information as was then before the Commissioner; and (ii) that, if further information be supplied, the possible consequence is a more favourable result for the partners (cf.
Wade
v.
Burns
(1966) 115 C.L.R. 537
at p. 555
as to ``anticipatory comments''; and
Cudgen Rutile (No. 2) Ltd.
v.
(Sir Gordon) Chalk
(1975) A.C. 520
at p. 553
as to the making of decisions, or the use of discretions, at particular stages of the statutory process).
(d) That adjustment sheet contains a further note that the adjusted net income of $4,649 is to be distributed between the 20 partners in a manner which is set out in an attachment thereto. (The mode of distribution is not in issue on the present references.)
3. (a) By agreement of the parties, the evidence has been given in a common hearing directed to the assessable income for the year ended 30 June 1977 of three of those partners, viz. an accountant, a specialist in a branch of medicine, and a proprietary company.
(b) The consequences of such a joint hearing are shown by the cases which are collected in
Case
M64,
80 ATC 451
at pp. 460-461.
4. (a) Each of these two persons, so also that proprietary company, made a return of income for that year on the footing that the respective portion of loss as in the partnership return was a deduction from assessable income.
(b) The Commissioner adjusted the income as returned by each of those three respectively so as to conform with his secondly made adjustment, as mentioned in para. 2 hereof. Notices of assessment issued accordingly to the partners severally.
(c) Each of those three taxpayers objected to the assessment addressed to him or to it; the Commissioner decided to disallow each objection; each such decision was referred to this Board for review; separate decisions will be issued for those taxpayers respectively.
ATC 580
5. (a) The aforesaid 20 entities entered into an agreement bearing date 7 June 1977 entitled with a firm name and ``Articles of Partnership''. There are two recitals of which only the first need be quoted:
``The partners have agreed to carry on in partnership the business of purchasing or acquiring for the purpose of their sale at a profit the shares debentures or other interests in any company or corporation public or proprietary and whether listed for quotation on any Stock Exchange or not the collection of any dividends bonuses or other entitlements accruing thereon and the resale of such shares debentures or other interests.''
(b) The habendum of the partnership agreement does not contain any exceptional provision, and so nothing is achieved by repeating the clauses thereof.
6. (a) The balance sheet of the partnership as at 30 June 1977 was as follows:
$
Capital Contributed 20,000.00
Add: Bonus Dividends received 1,000,000.00
------------
1,020,000.00
Less: Share Trading Losses and Expenses 999,031.01
------------
Partners' Capital $20,968.99
------------
Represented by:
Current Assets
Share Trading Stock - at lower of cost or market value 16,953.95
Cash at Bank 4,738.39
---------
21,692.34
Less: Current Liabilities
Owing to Broker re Share Purchases 723.35
----------
Net Assets $20,968.99
----------
(b) The profit and loss account for the few weeks of operation to 30 June 1977 is as follows:
$ $
Sales 1,023,044.54
Less: Cost of sales
Purchases 2,639,015.50
Less: Stock on hand at
30 June 1977 16,953.95 2,622,061.55
----------- ------------
Gross Loss on Share Trading 999,017.01
Add: Expenses
Bank Fees 5.00
Telex Charges 9.00 14.00
------------ ------------
Net Loss transferred to
Partners' Capital Account 999,031.01
------------
Bonus Dividends Received 1,000,000.00
------------
Transfer to Partners' Capital
Account $1,000,000.00
ATC 581
(c) Stock on hand was shown therein at 30 June 1977 to be -
Lower of
Market Cost or
Stock Number Price Cost Value Market
$ $ $ $
Audimco Ltd. 2,000 1.60 3,346.15 3,200.00 3,200.00
Pancontinental 250 12.15 2,930.55 3,037.50 2,930.55
Woodside - Rights 20,500 0.34 6,938.40 6,970.00 6,938.40
Ampol Exploration Ltd. 3,700 1.05 4,037.35 3,885.00 3,885.00
--------- --------- ---------
17,252.45 17,092.50 16,953.95
--------- --------- ---------
7. The partnership return has a schedule and a notation as follows:
Bonus Dividends Received
Number
&
Class Par Total
Company of Shares Value Value
$ $
(The second company
aforesaid) 79,400 Ordinary 2.00 158,800.00
(The first company
aforesaid) 420,600 Ordinary 2.00 841,200.00
------------
1,000,000.00
------------
The bonus shares were received from the above companies wholly and exclusively out of profits arising from the sale of property not acquired for the purposes of re-sale at a profit and are exempt in terms of sec. 44(2) of the Income Tax Assessment Act , 1936, as amended.
8. (a) The partnership return has a schedule of purchases and sales, set out below in a reduced form:
ATC 583
(b) The summation at the end of that table is as follows:
$
Loss and expenses 1,519,145.45
Less: Profits 520,412.94
------------
Loss (Error of
$10,000) 988,732.51 (sic.)
Add: Reduction of
stock to lower of
cost or market 298.50
-----------
$999,031.01
------------
9. The Commissioner's reasons for disallowing the taxpayer's claim as set out in the reg. 35(1) statement are as follows:
``(a) The net loss of $999,031 returned by the partnership for the year ended 30 June 1977 was correctly adjusted to a net income of $4,649 in that -
- (i) proceeds on sale of shares $1,623,044.54 are not assessable income in terms of section 25(1) of the Income Tax Assessment Act;
- (ii) amounts claimed as purchases and expenses $2,639,029.50, in relation to share transactions, are not deductible under the provisions of section 51(1) of the said Act;
- (iii) the amount of $16,954 brought to account as value of stock on hand at 30 June 1977 has been excluded, not being trading stock for the purposes of Subdivision B of Division 2 of Part III of the said Act;
- (iv) profit made by the partnership arising from the sale of shares in (the first company as in para. 2(a) hereof) and in (the second company as in para. 2(a) hereof) included in net income of the partnership in accordance with the provisions of section 26AAA of the said Act.
(b) As a consequence, the loss... returned by the taxpayer as (his) individual interest in the net loss returned by the above partnership for the 1977 year of income was correctly adjusted to an income... being (his) individual interest in the net income of the partnership for the year of income, pursuant to the provisions of section 92(1) of the said Act.''
10. For the company taxpayer and for the medical specialist taxpayer the amount of money first shown in para. (b) as in 9 hereof was $59,942 and $59,941 respectively, and the amount secondly shown was $278 for each of them; for the accountant taxpayer, those amounts were $19,980 and $92 respectively.
11. In a letter sent to the Commissioner soon after the receipt of the adjustment sheet as in para. 1 hereof, the partnership's accountants asserted that that adjustment sheet had been issued by the Commissioner pending an amendment to the Income Tax Assessment Act and for the purpose of denying deductions in accordance with the principle of Curran ; and that, in any event, the Commissioner had adopted a wrong apportionment basis. (The amendment Act No. 57 of 1978 inserted sec. 6BA in the principal Act; assent to the amendment Act was given on 22 June 1978; and sec. 6BA applies where bonus shares are allotted on or after 16 August 1977.)
12(a) The aforesaid amount of $1,750 (para. 2(a) hereof) corresponds (within one dollar) with the difference between what was the ``purchase'' price on 28 June 1977 of the parcel of shares in the first mentioned company, and what was the ``sale'' price on 28 or 29 June 1977 of that parcel of shares plus the bonus shares.
(b) The aforesaid amount of $2,899 (para. 2(a) hereof) corresponds (within one dollar) with the difference between what was the ``purchase'' price on 28 June 1977 of the parcel of shares in the secondly mentioned company, and what was the ``sale'' price on 28 or 29 June 1977 of that parcel of shares plus the bonus shares.
(c) The taxpayers contend in the notice of objection, that the mode of computation as in (a) and (b) hereof is in breach of the principle which is contained in the majority judgment in Curran .
(d) On another issue, i.e. as in para. 9(a)(iv), the objection is that the ``profit'' on the sale of the two parcels of shares is not assessable by reason of sec. 26AAA(5)(a); alternatively, if any amount is thereby assessable to tax, it
ATC 584
is less than has been included by the Commissioner.(e) The basal submission of the taxpayers' counsel is that the problem for solution is whether there is on these references substantial conformity with the facts as recited in the leading judgment in Curran . In the final address of the Commissioner's counsel, it was submitted that a ``clone'' of Curran is required to enable the taxpayers to succeed; and that the present evidence lacks essential conformity with Curran ; furthermore, that even where events are shown to have been reproduced as in Curran , this Board should make findings of fact additional to those which are set out in Curran , and on those facts the Board should hold that the taxpayers fail because there has been non-compliance with the Companies Act and articles of association and lack of necessary resolutions for a valid increase of share capital and for a valid increase of share capital and for a valid allotment of bonus shares, and a non-compliance with the Conveyancing Act for execution and use of powers of attorney as deeds and there has been a series of separate stock exchange transactions and not a business of share trading, and that the two Curran type transactions are comprehended by sec. 26AAA to the extent, if any, that the partners succeeding in obtaining any Curran type shares as purchasers or as beneficially entitled thereto; and that there has been a breach of the fundamental rule that taxpayers must produce all material documents and call as witnesses all persons who can depose to matters material to the issues and so produce creditable reasonably complete evidence to discharge the burden of proof; particularly that the ``substance and reality of the payment cannot be determined in artificial isolation''; the ``substance and reality of the payment must be determined by reference to all of those contractual arrangements and transactions of which it constituted an integral part'', by reference to the ``overall arrangements, and transactions which constituted its context''.
13(a) The presently important matter to be borne in mind is that Curran reached the Full Bench of the High Court by way of Case Stated (reproduced with a few minor omissions in 5 A.T.R. 61); the Case Stated tacitly accepts that (i) the appellant at all material times (prior to the sale by him of the subject shares) was absolutely entitled beneficially to all the shares as purchased by him and as obtained by the bonus issue; and (ii) the bonus shares were properly issued and held by the appellant at the material time. Thus two points which are crucial for the taxpayers on the instant references were not even mentioned in Curran ( vide the authorities on stating a case which are collected in Australasian Tax Review, March 1980, vol. 9, p. 3).
(b) Apart from that overriding consideration, the essential facts in Curran were these:
- (i) The appellant, a stockbroker, during the tax year ending on 30 June 1969, was dealing in shares on his own account. In keeping his financial accounts in connexion with that business he treated the shares which he bought as his stock in trade, bringing to account as the opening entry for the financial year all the shares he then had on hand at their market value or cost whichever was the lower, entering to his debit the cost of all the shares which he acquired during the year and to his credit the amounts received for shares of which he disposed during the year, and bringing to account at market value or cost whichever was the lower as a closing entry the shares of which he remained possessed at the end of the financial year. The difference between the total of the first two items and the total of the second two represented his gain or loss in his share dealing for the year. He had also an income account to which he carried the amount of dividends which he received during the year.
- (ii) He purchased in the tax year shares in various companies which, after he had become a shareholder, resolved to issue bonus shares either out of the proceeds of the realization of assets not acquired for the purpose of resale at a profit, or out of the amount of the revaluation of assets not acquired for the purpose of resale at a profit, or out of a share premium account, or out of a combination of these elements. The appellant debited his share dealing account with the amount of capital credited as paid up in respect of such bonus shares as the price paid for them as well as the cost of the shares in the company originally acquired by him.
ATC 585
Later, when he sold the shares originally acquired and the bonus shares, he credited the account with the amount received on the sales. Over the period of the year, these entries, along with all other entries of shares purchased and sold and with the value or cost as the case may be of opening and closing lists of shares on hand, resulted in what was claimed to be a trading loss of $206,019. - (iii) In his return of income for the tax year, the appellant entered his dividend and other income so far as its receipt constituted assessable income and claimed to deduct the abovementioned sum of $206,019 as a loss under sec. 51.
- (iv) On 28 April 1969, the appellant purchased 200 fully paid shares in Stewart Bacon Holdings Pty. Ltd. (Stewart Bacon) for the sum of $186,046.48 which was at the rate of $930.23 per share. The issued capital of that company at that date was $215. Its assets consisted of $206,619.78 at bank on current account. Its liabilities were $162.02. It had a capital profits reserve account ($206,242.76) which represented the proceeds of the realization of assets not acquired for the purpose of resale at a profit. The articles of association of the company were (so far as relevant) in the form of the regulations in Table A to the 4th Sch. of the Companies Act , 1961 (N.S.W.). Its nominal capital on that date was $100,000 divided into 100,000 ordinary shares of $1.00 each.
- (v) The appellant was registered as a member of the company on 28 April 1969 in respect of the 200 ordinary fully paid shares in the capital of the company which he had that day purchased.
- (vi) At an extraordinary general meeting of shareholders held on 6 May 1969 it was resolved that the nominal capital of the company be increased to $250,000, by the creation of 150,000 new ordinary shares of $1.00 each; an additional article be adopted, in effect, that any general meeting declaring a dividend may (on the recommendation of the board) resolve that such dividend be paid wholly or in part by the distribution of specific assets and in particular of paid-up shares, and further resolve that any money, investments or other assets forming part of its undivided profits to its credit in a reserve account or in its possession and available for dividend or representing premiums received on the issue of shares and standing to the credit of the share premium account, be capitalised and distributed amongst the members in accordance with their rights and on the footing that they become entitled thereto as capital and that all or any part of such capitalised fund be applied on behalf of the members in paying up in full any unissued shares of the company and unissued shares so fully paid be distributed accordingly amongst the members in the proportion in which they are entitled to receive dividends and be accepted by them in full satisfaction of their interests in the said capitalised sum: the sum of $205,325 forming part of the capital profits reserve account be ``capitalized'' and distributed amongst those who were members in respect of ordinary shares on 29 April 1969 ``on the footing that they become entitled thereto as capital in pursuance of'' the material article, and in proportion to their ordinary shareholding; the capitalized sum of $205,325 be applied in paying up in full 205,325 of the unissued ordinary shares of $1.00 each in the capital of the company and the same be distributed amongst the members aforesaid in fully paid ordinary shares of $1.00 each in satisfaction of the said capital sum and in proportion to the number of shares then held by them respectively; the said 205,325 shares rank in all respects equally with existing ordinary shares of $1.00 as from 6 May 1969.
- (vii) Later the same day, the board of directors of the company allotted to the appellant 191,000 fully paid $1.00 shares, being his entitlement under the abovementioned resolutions; later still on the same day the appellant sold for the sum of $197.52 the 200 shares initially purchased by him and for the sum of $188,631.60 the 191,000 bonus shares.
- (viii) In his shareholding account, the appellant entered the sum of $191,000 as the purchase price of the 191,000 bonus shares and the proceeds of their sale in the record of shares sold; taking this
ATC 586
accounting of the transaction in the shares of Stewart Bacon, there was a loss of $188,217.36, which sum was included in the total of $206,019 claimed to be deducted in the appellant's return of income.
(c) The appellant contended that that method of accounting (as set out in the stated case) properly reflected the financial result of his transactions in the shares of Stewart Bacon (cf. the codex of Lord Russell as in para. 27 hereof).
(d) The appellant's contention began with the proposition that a company cannot issue shares as wholly or partly paid except against payment of the amount for which they are to be credited as paid-up, or without creating a liability in the shareholder who accepts them to pay that amount. Where a company has profits available for distribution it may issue paid-up bonus shares to the extent of the amount of such profits, assuming its articles of association allow that course. Whether the company does so expressly or not, the effect of a decision to issue bonus shares paid-up to some amount is to declare a dividend of the amount requisite to balance the amount for which the bonus shares are to be treated as paid-up; such dividend not being payable in cash but to be credited to the shareholder against the liability to pay the amount for which the bonus shares are to be credited as paid up, a liability which arises from the issue and acceptance of such shares.
(e) Barwick C.J. at pp. 4300-4301; 414-416 said:
``Thus, in more than a formal sense, the shareholder who has been credited actually or notionally with an amount of distributable profits pursuant to a resolution to capitalise them and to issue bonus shares to a total paid-up value equal to or less than the amount of such profits, by accepting the bonus shares in terms of the resolution to issue them has paid for the shares. By accepting them he has agreed to the application to the capital of the company of the amount of the distributable profits so credited to him, thus effecting payment for the shares.
For the purposes of income tax under the Act, the amount of the distributable profits thus credited to the shareholder constitutes income. This is so whether or not the company first purports to capitalise such profits before effecting any distribution of them. Having regard to
Blott's case (1921) 2 A.C. 171 , it may properly be said that the receipt of the bonus share, representing an interest in the capital of the company, is not income: but the crediting of the sum of profits used to effect payment for that share is income....Thus, where a company having distributable profits impliedly effects their distribution by the issue against them of bonus shares fully or partly paid-up, the recipient of the shares, having regard to the definition of `dividend' in sec. 6 of the Act, must treat himself as having received income to the amount of the profits of the company applied to pay for the bonus shares and, in my opinion, will be entitled to regard those shares as having cost him that amount of money, even though the resolutions of the company do not provide for payment to him of that sum of money. Whether or not the recipient of the bonus shares must pay income tax in respect of the amount credited to him by the company in connection with the issue of the bonus shares depends on the provisions of the Act. But, in my opinion, whether or not he pays income tax on the amount so credited can have no relevance to the question whether he is entitled to treat himself as having paid the amount credited to him by the company as the cost of the bonus shares.
In the present case, sec. 44(2)(b)(iii) of the Act in the circumstances of the issue of the bonus shares by Stewart Bacon exempts from income tax the amount credited to the appellant in respect of the issue of the shares. But that does not mean, in my opinion, that the appellant is not to be regarded as having paid for those shares the amount of their paid-up value. The appellant is bound to treat the amount of $191,000 credited by the company as income received by him, though by reason of sec. 44(2)(b)(iii) it is not assessable income. In my opinion, he is also entitled to treat himself as having paid for the bonus shares the amount credited to him by the company in connection with the issue of those shares. He paid for them by means of the credit
ATC 587
given him by the company of his aliquot share of the distributable profits of the company derived from the realisation of assets not acquired for resale at a profit. The resolutions of the extraordinary general meeting of Stewart Bacon went to unnecessary lengths in purporting to allot aliquot portions of the capitalised profits of the company to the shareholders before resolving to issue the bonus shares. But it was the resolution described in the side note as a `Special Resolution Effecting Bonus Issue of Shares from Capital Profits Reserve', which included the resolution to apply a capitalised sum in paying in full the bonus shares, which was effective to warrant the appellant in treating the amount credited to him as his share of the capitalised profits, as having been paid by him for the bonus shares issued to him. Consequently, I would regard the appellant's account of his share dealings in the year of income as accurately reflecting the result of his transactions in the shares of Stewart Bacon. In my opinion, for the purposes of determining his assessable income, the appellant rightly claimed to have suffered a loss of $188,217.36 on his transactions in the shares of Stewart Bacon in the tax year ending 30 June 1969.''
(f) For present purposes there is no need to set out in any detail the reasons of the other members of the High Court in Curran , whether in the majority or minority (see further para. 28(c) hereof).
14(a) I am satisfied on the ordinary civil standard of proof that in a suit in equity as at 30 June 1977 the Court would hold that all the partnership transactions on the stock exchange in June 1977, and both the so-called `` Curran '' type transactions were on behalf of all signatories to the partnership agreement (whether or not the signature preceded or was subsequent to any one or more of the stock exchange transactions); and I see no valid reason for arriving at any other conclusion on these references.
(b) The aforesaid transactions on the stock exchange have the character of dealing, and so I conclude further that the partnership (and so each of the 20 members) was a dealer on the stock exchange during June 1977.
(c) Obviously, the dealings with shares in the first and secondly mentioned companies aforesaid were not dealings on the stock exchange, and that corresponds with the position in Curran ; yet they were dealings on behalf of the partners.
(d) The absence of one counterpart of the partnership agreement does not persuade me to hold on the aforesaid standard of proof, that there has been any failure to prove that all 20 members signed the document and at a time when all would be bound as in (a) hereof and with the further consequence as in (b) and (c) hereof (cf.
Commr. of State Taxation (W.A.)
v.
Kowald
80 ATC 4255
).
(e) I disregard for present purposes, as not having a disentitling consequence, such matters as (i) the attestation of the signature of the donor of a power of attorney; (ii) the non-affixing of a seal to a power of attorney which is intended to be and is used upon the affixation of a seal by the donee of the power; (iii) any delegation by the donee of a power of attorney where, perhaps, not expressly entitled to delegate; (iv) the contents of income tax returns of later years and transactions of later years.
(f) As indicated in the opening address of counsel for the taxpayers, the references proceeded on the basis that there was no dispute that in each instance the fund from which the relevant dividend was ``paid'' was properly characterised as a capital fund arising from the sale of an asset (in one instance a business, and in the other a grazing property) which was not purchased for the purpose of resale at a profit; this also corresponds with the position as in Curran .
15. It matters not whether the intention of the accountant/taxpayer (as having de facto control of some partnership operations, subject, doubtless, to the supervision of a senior partner in the firm which employed him) was that all the undermentioned events should occur on one or two or three of the days 28,29 and 30 June 1977, but whichever he intended the substance of his proposed actions were these:
- (i) the shareholder (as at the outset) in each of the two companies firstmentioned would respectively lend by way of cheque $1,360,400 and $254,500 to the partnership;
ATC 588
- (ii) the partnership would write out cheques for $1,360,400 and $254,500 to be handed over as the purchase price (or thereabout) of the parcels of shares in the first and secondly mentioned companies respectively;
- (iii) pursuant to powers of attorney, transfers of those parcels of shares would be executed in favour of the partnership (or its nominee) and registered in the respective share registers;
- (iv) pursuant to powers of attorney and/or proxies, there would be any necessary amendments to the memoranda of association for increase of nominal capital and so as to enable the requisite number of fully paid (ordinary) bonus shares to be issued (and in the instance of the secondly mentioned company, introduction of the taxpayer accountant and another such person as new directors); and there would be resolutions by each such first and secondly mentioned company and by the respective board of directors (as might be appropriate) leading to the issue of the requisite number of Curran type fully paid (ordinary) bonus shares in favour of the partnership, or, at least, nominally in favour of the partnership;
- (v) those respective vendors (as in (i) above) would lend by way of cheques $1,362,150.60 and $257,400 (or thereabouts) respectively to the proposed ultimate shareholder, being the proposed purchaser from the partnership of the issued shares and the proposed bonus shares;
- (iv) the proposed ultimate shareholder would write out cheques for $1,362,150.60 and $257,400 to be handed over as the purchase price (or thereabouts) from the partnership of shares (as existing plus proposed bonus issue) in the first and secondly mentioned companies respectively;
- (vii) cheques would be deposited with the bank in appropriate sequence;
- (viii) the partnership (or its attorneys or nominees) would execute transfers of all the aforesaid shares in favour of the ultimate purchaser and those transfers would be registered in the respective share registers in appropriate sequence.
16(a) Whilst there was no major problem in setting up the partnership as a dealer in shares on the stock exchange, the difficulty for the accountant/taxpayer (as the controller of this aspect of the partnership affairs) apparently was that the group of 20 did not have (or was unwilling to commit itself to obtain and outlay) the large amount of money necessary to acquire the shares in the first and secondly mentioned companies, and therefore the partnership, before committing itself to steps (i) and (ii) as in para. 15 hereof, entered into an agreement with the proposed ultimate purchaser as in para. 15(v), (vi), (vii), (viii) and 30 hereof.
(b) No arrangements were made with any bank, or other such corporation, as financier, to honour on presentation any of the cheques which are mentioned in para. 15 and 30 hereof; the notations on bank ledger sheets demonstrate that such cheques (without being honoured) were treated as off-setting each respective other.
(c) The existence of the available capital assets in the first and in the second mentioned companies aforesaid for Curran type transactions was known to the accountant/taxpayer at all material times more particularly prior to the execution of the partnership agreement; and, by inference, was similarly known to all other partners.
(d) Prior to the execution of the partnership agreement, the accountant/taxpayer had persuaded (by promise of an advantage which remains elusive) the respective shareholders as in para. 15(i) hereof to agree to participate in the carrying out of the transactions as outlined in para. 15 and 30 hereof.
(e) Prior to the execution of the partnership agreement, it was known to the accountant/taxpayer that one of the members of the partnership was associated with the ultimate purchaser in such a way that that partnership member was empowered to write out cheques for the ultimate purchaser; and this is inferred to have been similarly known to all other partners who had any interest in knowing details of the plan which was to be carried through.
17. The intended result of what is set out in para. 15 hereof was (i) that the partnership
ATC 589
had obtained a loan; (ii) the partnership had bought and paid for the then existing issued shares in the first and secondly mentioned companies aforesaid; (iii) the partnership had obtained a bonus issue of shares from each of those two companies; (vi) the partnership had sold and been paid for the total shareholding (plus bonus shares) in each of those two companies and transferred the same to the ultimate purchaser; (v) the partnership had repaid the money lent to it.18(a) The partnership has the benefit of the observation of
Dixon
C.J. in
Davis Investments Pty. Ltd.
v.
Commr. of Stamp Duties (N.S.W.)
(1957-58) 100 C.L.R. 392
at p. 407
that if there is no interest involved but that of the shareholders, and their legal interests are not invaded, then no one is entitled to complain, if what is done is not accomplished by a means provided by company law, e.g. such incidents as affixing a seal to a power of attorney without having a resolution to do so, or holding a meeting informally or at short notice without a timely waiver.
(b) Some of the cheques for the ``loans'' and ``purchases'' in the Curran type transactions were banked out of order. Thus it was shown that a cheque which was intended to be for the repayment of a loan was banked before the banking of the cheque which was intended to be for the purchase of shares in the first company aforesaid; whereby the loan was repaid before the shares were paid for; or it might be said that a loan was repaid at much the same point of time as the loan was made. Such a mishap is of significance to the extent that it bears on the question of the truth and substance of the transactions which revolve around the exchange of cheques.
19. As no arrangements had been made that the bank should honour the cheques for those large amounts of money, the presentation of the cheques en masse (or even with a day or two intervening between two lots of cheques, if that ever was intended) was a convenient way of recording transactions which were intended to be effected by exchange of cheques, i.e. what is sometimes called a ``round robin of cheques''. This exchange of cheques was effected, it would seem, when the accountant/taxpayer received cheques in various capacities and held (or handed over and received back, perhaps notionally) cheques as drawn on behalf of the partnership and by others. In the absence of any arrangement with the bank for the provision of finance whereby the cheques could be honoured on presentation, the banking of the cheques was not crucial (cf. Case M56, 80 ATC 369 at pp. 379-380). The banking of cheques served as a formal record of events.
20. Although much older (
vide
para. 21 hereof) the doctrine of exchange of cheques is usually taken to be based on
Fothergill's case
(1873) 8 Ch. App. 270
and on
Spargo's case
(1873) 8 Ch. App. 407
as approved by the Privy Council in
Larocque
v.
Beauchemin
(1897) A.C. 358
at p. 365
. That doctrine, in a more general form of notional payment, has been applied expressly or impliedly in a wide variety of circumstances, see, for example,
Bouch
v.
Sproule
(1887) 12 App. Case 385
;
Parsons Equitable Investment Co.
(1916) 2 Ch. 527
at p. 530
;
Blott v. I.R. Commrs.
(1920) 1 K.B. 114 at p. 133, (1921) 2 A.C. 171 at pp. 192, 194, 196, 198;
B.S. Lyle Ltd.
v.
Chappell
(1932) 1 K.B. 691
at pp. 700-701
;
J.C. Williamson's Tivoli Vaudeville Pty. Ltd.
v.
F.C. of T.
(1929) 42 C.L.R. 452
at p. 460
;
Commr. of Stamp Duties (N.S.W.)
v.
Perpetual Trustee Co. Ltd. (Saxton's case)
(1929) 43 C.L.R. 247
at p. 263
;
Messer
v.
D.F.C. of T.
(1934) 51 C.L.R. 472
at pp. 480-481
;
Trinidad Lake Asphalt Operating Co. Ltd.
v.
Commr. of Income Tax for Trinidad and Tobago
(1945) A.C. 1
at p. 9
;
Carter
v.
The Potato Marketing Board
(1951) 84 C.L.R. 460
at p. 469
;
F.C. of T.
v.
Fuller Pty. Ltd.
(1959) 101 C.L.R. 403
at pp. 418-419
;
Caltex Ltd.
v.
F.C. of T.
(1959-60) 106 C.L.R. 205
at pp. 227, 231
;
Mobil Oil Australia Ltd.
v.
F.C. of T.
(1965) 112 C.L.R. 407
at p. 440
;
Hennessey
v.
F.C. of T.
;
Malone
v.
F.C. of T.
75 ATC 4007
at p. 4012
;
Mullens and Ors.
v.
F.C. of T.
(1975-76) 135 C.L.R. 290
at pp. 307, 308, 313, 314
;
Mardorf Peach
&
Co. Ltd.
v.
Attica Sea Carriers Corporation of Liberia
(1977) A.C. 850
at p. 880
;
F.C. of T.
v.
Kareena Hospital Pty. Ltd.
79 ATC 4667
at p. 4677
.
21. In
Australian Mercantile Land and Finance Co. Ltd.
v.
F.C. of T.
(1929) 42 C.L.R. 145
at p. 150
Rich
J. quoted the following passage from
Maule
J. in
Maillard
v.
Duke of Argyle
(1843) 6 Man
&
G. 40
at p. 45
:
ATC 590
``Payment is not a technical word; it has been imported into law proceedings from the exchange, and not from law treaties.... You may support a plea of payment, by showing that a person agreed to accept a horse from another in satisfaction, and the same as to goods, provided the agreement was to take the articles as money .''
22(a)
Spargo's case
is an instance of a more general principle that the law does not require anyone to perform a futile act, and so the law has regard to the reality or unreality of making a tender of money (i.e. in the strict meaning of ``money'') or giving a notice etc. (
Burnham
v.
Carroll Musgrave Theatres Ltd.
&
Anor.
(1928) 41 C.L.R. 540
at p. 548
;
Peter Turnbull
&
Co. Pty. Ltd.
v.
Mundus Trading Co. (A'asia) Pty. Ltd.
(1953-54) 90 C.L.R. 235
at p. 245
;
Norman
v.
F.C. of T.
(1963) 109 C.L.R. 9
at pp. 36-37
;
Vukelie
v.
Sadil-Quinlan and Associates Pty. Ltd. and Anor.
(1976) 26 F.L.R. 457
at p. 465
;
Braithwaite
v.
Foreign Hardwood Co.
(1905) 2 K.B. 543
at pp. 552, 554
;
New Brunswick Rly. Co.
v.
British and French Trust Corp'n. Ltd.
(1938) 4 All E.R. 747
at p. 757
;
Sinason-Teicher Inter-American Grain Corporation
v.
Oilcakes and Oilseeds Trading Co. Pty. Ltd.
(1954) 1 W.L.R. 935
at p. 943
).
(b) However the law has contempt for fictions, and a document which has been entered into with due solemnity may be held to have achieved nothing (
Commr. of Stamp Duties
v.
Hopkins
(1945) 71 C.L.R. 351
at p. 360
;
Permanent Trustee Co.
v.
Scales
30 S.R. 391
;
Nev Ham Nominees Pty. Ltd.
v.
Commr. of Stamp Duties
78 ATC 4095
at p. 4100
).
(c) Compare for example some of the comments made by judges (on the facts before them) re notional payment:
- (i)
Jaques v. F.C. of T. (1923-24) 34 C.L.R. 328 at p. 360 (disregarding the sec. 260 effect for present purposes, for this and (ii), (iii) and (iv) of the following extracts from judgments): ``It was in no true sense a business operation. But, by first deliberately preparing the ground for the misuse of legal expedients recognized as equivalent for payment, and then by such misuse, a factitious liability to pay a call an a factitious payment of the call ensued...'' - (ii)
Bell v. F.C. of T. (1951-53) 87 C.L.R. 548 passim pp. 559-572; 10 A.T.D. 164 : " The crux of the scheme was the manipulation of the sum... interposed between the company and the partners in the guise of a borrower... he was not that in fact... they were all merely automatons of the partners. The scheme gives... the false colour of consideration... only conduits through whom the sum... was paid... the supposed loans and purchases were fictitious. The minute book records a decision... to lend... not... a genuine loan... neither... nor any of his shareholders of convenience received anything out of the sum... juggled in carrying out the scheme... The drawing of the seven cheques... and the payment of the cheques into the account of... and his nominees amounted to nothing but a pretence... the scheme was so devised that such a misadventure as that (money) would fall into the lap of any of them could not happen... - (On appeal and affirming the primary judgment): There was nothing fraudulent... sedulous care was taken that it should be in conformity with the law... there was no pretence or suppression about it. Of no step that was taken can it be said that it was not intended to be real or was intended as a cloak for anything else... every step in their procedure was effectual as between themselves to do what it purported to do. "
- (iii)
F.C. of T. v. Newton (1956-57) 96 C.L.R. 577 at pp. 632, 634; 11 A.T.D. 187 at p. 217 : ``Everything was done and intended to be done on the footing that... the only real money to be used would come from the companies and most of it would go back to the companies... and in the meantime, on the way round, it would be used as the purchase price.'' - (iv)
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at p. 9, 11 A.T.D. 442 at p. 446 : ``But when one looks at the way the transactions were effected... the way cheques were exchanged for like amounts and so forth...'' - (v)
Caltex (supra)
at p. 227: ``It may no doubt be said, as a matter of legal analysis,... But this is only part of the truth. The substance and reality of what
ATC 591
happened was... that was what was intended, and that was what was achieved... the question... cannot depend on the form which the transaction took. That question must depend on the substantial effect of what was done on the financial position of the company, and the essential facts are that the company's American indebtedness was not discharged, but remained unchanged...'' - (vi)
Henty and Constable (Brewers) Ltd. v. I.R. Commrs. (1961) 3 All E.R. 1146 at pp. 1150-51 : ``If it could be shown that the bargain was really... the sale... being a mere simulacrum or cloak to hide the real transaction... But if the... agreement takes effect according to its terms...'' - (vii)
Rowdell Pty. Ltd. v. F.C. of T. (1962-63) 13 A.T.D. 242 at p. 251 : ``When the facts of the transactions are fully considered the proper conclusion... is that... the essence of the plan was that... reality does not go to the length of enabling an apportionment that the vendors and purchaser did not make to be made as a matter of law subsequently.'' - (viii)
Arbuckle, Bolton and Wruck v. F.C. of T. (1964) 13 A.T.D. 378 at pp. 383-388 : " In appearance all four cheques were signed by... with the same pen and ink; they bear consecutive numbers; and the bank notations on them show that they were all banked on the same day... Having drawn the two cheques each in favour of himself or order, he is said to have received them as being money lent to him... Then it is said that with the money he had so borrowed he paid himself for the two separate... interests in the partnership that... he had purchased from himself... that that meant that the cheque he had received as money lent to him in his capacity as a trustee he now held on his own account. Then it is said that by endorsing the two cheques... he lent the (total of the two) to the partnership and as a partner he received this sum and endorsed the cheques (in favour of the partnership).... all this business with the cheques was a futility... ceremonious endorsing of the cheques... discrepancies in dates... are not critical... But they are illustrative of the factitious, if not fictitious, character of these transactions. And they make it difficult to accept the documents at their face value. - As between the bank and its customers, the partners, the position after all this signing, endorsing and depositing of cheques was exactly what it had been a half-hour or so earlier before it all began, except... their supposed payments... to the partnership were not treated as being by way of loan, but as a discharge of debts they each then owed to the partnership... as between themselves, the position... as members of the partnership was unchanged from what it had been - except that upon a dissolution... But of course their practice as public accountants was carried on by them exactly as it had been before... But this deposit... seems to have been the merest formality... These transactions were treated as reducing the loan accounts appearing on the assets side of the balance sheet... the appellants... attach importance to each stage of these devious dealings. Their seeming complexity disappears, however, when they are seen to be founded on misapprehensions... they accomplish nothing... and I do not think that there was in reality any sale. The writing on the back of cheques that occurred was not in the circumstances the payment of a price. Rather it was the performance of a pretence... Some of the documents produced may seem disingenuous in parts and to have been brought into existence to provide verisimilitude... But... their transactions were nugatory. "
- (ix)
Selangor United Rubber Estates Ltd. v. Cradock (a Bankrupt) & Ors. (No. 3) (1968) 2 All E.R. 1073 passim pp. 1143, 1147, 1148 : ``The nub of the... case... is the circular movement of the... cheques and the explanation given... about it... The satisfaction of W's debt is said to have been effected in accordance with the plaintiff company's resolution... by a cheque... in settlement of C's liability and bills payable on future specified dates... in settlement of B's liability; such cheque... being delivered... and paid... as part of the circular movement of three cheques for the same amount... If these payments... were only made as part of the three cheque circular movements, by which the payments to the plaintiff
ATC 592
company were dependent upon the corresponding payments out by the plaintiff company's directors from the plaintiff company's account to the payer, by a scheme in which the payer participates and without advantage to the plaintiff company, then the payer is giving with one hand what he at the same time takes away with the other. The plaintiff company has the satisfaction of a conduit pipe. Even if one whistles half-time when the money is in the plaintiff company's hands, yet it must be the final result that matters on this as in any other little games, the more so if the game is... fixed from the start. Satisfaction must be true and real satisfaction and not part of what makes satisfaction a mockery.'' - (x)
Wallersteiner v. Moir (1974) 1 W.L.R. 991 passim pp. 999-1011 : ``So arrangements were made for a `round robin' of cheques by which the indebtedness would be paid off without any cash passing at all... The net result of this circular cheque transaction was that in point of law the sum... had been paid to HB and its subsidiaries in discharge of debts owing to them; and that HB and its subsidiaries had immediately lent that sum to TFT on the terms that it was repayable... But the legal effect... of circular cheques was this: the inter company indebtedness... had been discharged. The... trust had fulfilled its obligations under that agreement. It had become entitled to the... shares of HB. Yet it is clear that HB had rendered financial assistance. Whereas previously it was owed... payable immediately by CB, that indebtedness had been discharged and in lieu it was owed that same sum by IFT... payable by instalments... guaranteed by the... trust...'' - (xi)
Black Nominees Ltd. v. Nicol (H.M. Inspector of Taxes) (1975) 50 T.C. 229 at pp. 281-282 : " In the transactions... sums of... appear to have changed hands: but they all disappeared. (Counsel) argued... that the same could be said where a vendor sells and accepts a mortgage from his purchaser for the full purchase price. But in that case the money does not vanish; the purchaser acquires the property and the vendor acquires the money secured on the property... In the present case there was only one asset, the C rights. The money was disappearing money which did not represent a true purchase price and which vanished, leaving the original one and only asset, the C rights. The money was disappearing money which did not represent a true purchase price... In
Timbrell v. Lord Aldenham's Executors (1946) 28 T.C. 293 ... there were real debts, real loans and real payments. At the end there was a different position from that which obtained at the beginning. There were no circular payments which began and ended with the same payer. No money disappeared... The trick in the present case is that the (money) disappeared. It did not belong to anybody when the performance began, and it did not belong to anybody when the performance ended. It was invented by... advisers for the purpose of performing a circle of payments... In the present case circular payments disguised the fact that nothing was being accomplished save provision for the distribution of the C rights. " - (xii)
Sachs v. F.C. of T. 77 ATC 4001 at p. 4007 : ``It does appear that until these cheques were banked, National Nail did not have sufficient funds to meet the three cheques which it had drawn in favour of Panjara. Neither Mr. Offner nor the taxpayer made any inquiries as to the financial position of Stratford.'' - (xiii)
Mardorf (supra)
at p. 880: ``Certainly it was not within the banker's express or implied authority to make commercial decisions on behalf of their customers... without taking instructions... No doubt, a certain amount of processing or paper work has to be done even in relation to a cash payment before it finds its way as a credit into the haven of the customer's account. If the cash is paid in to the bank just before it closes on a Friday afternoon it is unlikely, if not impossible, that the customer could have drawn it out before the bank closed for business that afternoon. The customer would probably have had to wait for payment until the following Monday morning. No doubt certain valued customers would be admitted to a bank after banking hours and allowed to cash a cheque even against moneys received on
ATC 593
their account but which had not yet passed through the books.''
23. On the present reference the book entries which are fundamental to the taxpayer's case are those which are set out in para. 6, 7 and 8 hereof.
24. (a) Book entries cannot be used to distort the history of a transaction or to depart from the facts of the matter (cf.
Fitzleet Estates
v.
Cherry
(1977) 1 W.L.R. 1345
at p. 1350;
(1977) 3 All E.R. 996
at p. 1000
;
Colonial Mutual Life Assurance Society Ltd.
v.
F.C. of T.
(1953) 89 C.L.R. 428
at pp. 447-8;
10 A.T.D. 274
at pp. 279-280
;
Albion Hotel Pty. Ltd.
v.
F.C. of T.
(1965) 115 C.L.R. 78
at p. 92;
13 A.T.D. 435
at p. 443
).
(b) How a sum should be treated on the ordinary principles of commercial accountancy is only one of the matters to be considered (
B.P. Australia Ltd.
v.
F.C. of T.
(1965) 112 C.L.R. 386
at p. 403;
14 A.T.D. 1
at p. 11
).
(c) In the absence of any statutory direction, the method of accountancy depends upon business conceptions and the practice of accountancy as determined by the court (
J. Rowe
&
Son Pty. Ltd.
v.
F.C. of T.
71 ATC 4157
at p. 4160;
(1971) 124 C.L.R. 421
at p. 452
;
F.C. of T.
v.
James Flood Pty. Ltd.
(1953) 88 C.L.R. 492
at pp. 506-507;
10 A.T.D. 240
at p. 244
;
Amalgamated Zinc (De Bavay's) Ltd.
v.
F.C. of T.
(1935) 54 C.L.R. 295
at p. 307;
3 A.T.D. 288
at p. 296
;
Overton's Trustees
v.
C. of I.R. (N.Z.)
(1968) N.Z.L.R. 603
;
Shadforth
v.
H. Fairweather
&
Co. Ltd.
(1966) 43 T.C. 291
at p. 299
applied in
Bowie
v.
Reg-Dunn (Builders) Ltd.
(1974) 49 T.C. 469
at p. 480
;
Ostime
v.
Duple Motor Bodies Ltd.
(1961) 2 All E.R. 167
at pp. 173-174;
39 T.C. 537
at pp. 570-571
;
Odeon Associated Theatres Ltd.
v.
Jones
(1971) 2 All E.R. 407
;
(1972) 1 All E.R. 681
;
48 T.C. 257
;
Heather
v.
P.E. Consulting Group Ltd.
(1973) 1 All E.R. 8
at p. 13
).
(d) The proper purpose of the entries is to record transactions; the entries per se do not create transactions; the transactions must be proved aliunde . (See further the line of authorities set out by Stephen J. in Curran (pp. 4309-4310; 428-430).)
25. The common evidentiary statutory provision that books of account of a business shall in legal proceedings be prima facie evidence of the matters, transactions and accounts therein recorded, is of little use to a taxpayer who is contesting an assessment. A provision as in the present partnership agreement, that partners are committed by book entries, will also fail to supply the deficiency of proof, if there be any such deficiency.
26. In
Wix Corporation N.Z. Ltd.
v.
C. I.R. (N.Z.)
(1979) 4 NZTC 61, 499
Mahon J. said at p. 61, 513:
``As I see the matter, there is an intractable difficulty standing in the way of the... `substance' approach... That difficulty is to be found in the altered approach which now prevails in New Zealand as to the interpretation of corporate acts and documents for fiscal purposes. That approach is best exemplified, in my opinion, by the following extracts from the judgment of the Court of Appeal of New Zealand delivered by Richardson J. in
Re Securitibank Ltd. (No. 2) (1978) 2 N.Z.L.R. 136 . At pp. 167-8 Richardson J. said this:
- `... It is well settled that, where documents have been drawn to define the relationship of persons involved in a business operation, the true nature of the transaction can only be ascertained by careful consideration of the legal arrangements actually entered into and carried out (
Helby v. Matthews (1895) A.C. 471 ;
I.R. Commrs. v. Duke of Westminster (1936) A.C. 1 ;
I.R. Commrs. v. Wesleyan & General Assurance Society (1946) 30 T.C. 11 ). As Lord Tomlin said in the Duke of Westminster case (at pp. 20-21):
- " ... the substance is that which results from the legal rights and obligations of the parties ascertained upon ordinary legal principles... "
- It is the legal character of the transaction which is decisive, not the overall economic consequences to the parties (
C. of I.R. v. Europa Oil (N.Z.) Ltd. (1971) N.Z.L.R. 641 at pp. 648-649; (1971) A.C. 760, 771-2 ;
ATC 594
Europa Oil (N.Z.) Ltd. v. C. of I.R. (N.Z.) (1976) 3 NZTC 61, 066, 61, 072 ; (1976) 1 W.L.R. 464, 472 ; 76 ATC 6001 . That character is not determined conclusively by the nomenclature used by the parties. Consideration must be given to the whole of the contract in order to determine the true nature of the relationship. If the transaction is embodied in a number of interrelated agreements, all the agreements must be considered together and one may be read to explain the others. The first question then in this class of case is: what is the substance of the bargain as disclosed by the documents before the Court ( Re George Inglefield (1933) Ch. 1, 24). In arriving at the answer to that question, the circumstances surrounding the entering into the transactions may be taken into account. This does not mean that evidence is admissible to vary or contradict the written agreement; only that before you construe the agreement you are entitled to understand the setting in which it was made and that you construe it against that background.'It was the same judge who delivered the judgment of the Court of Appeal in
Buckley & Young Ltd. v. C. of I.R. (N.Z.) 78 ATC 6019 ; (1978) 3 NZTC 61, 271 ; (1978) 2 N.Z.L.R. 485 . That was an income tax case, and the question was whether certain payments made by a company were on revenue or capital account. Again, at ATC pp. 6023-6024; NZTC pp. 61, 275-61, 276; N.Z.L.R. pp. 489-90, the general principle set out by Richardson J. in the Securitibank case was applied... it was pointed out by Richardson J. that where analysis of the documentation may not determine the true character of the payment, then evidence of the surrounding circumstances may be of particular significance in determining what the expenditure was calculated to effect from a practical and business point of view. Again, there may be cases where the documentation is attacked as being merely a cloak intended to conceal the true arrangement. It was pointed out that in such a situation the court is not limited to evidence of surrounding circumstances strictly so called, but may receive all evidence which bears on the question as to whether the documents constitute a sham. That approach is in harmony with the judgment of the House of Lords in
I.R. Commrs. v. Church Commrs. for England (1976) 2 All E.R. 1037 where again the question was as to the true character for taxation purposes of payments which had been made, it being held that extrinsic evidence was admissible in so far as it tended to show the true character of a transaction.''
27. In the course of his judgment in
Wix Mahon
J. at p. 61, 510 referred to the codex of Lord
Russell
in
Hill
v.
Permanent Trustee Co. of N.S.W.
(1930) A.C. 720
at pp. 730-732
of which only some of the salient points need be reproduced here:
``A limited company when it parts with moneys available for distribution among its shareholders is not concerned with the fate of those moneys in the hands of any shareholder. The company does not know and does not care whether a shareholder is a trustee of his shares or not. It is of no concern to a company which is parting with moneys to a shareholder whether that shareholder (if he be a trustee) will hold them as trustee...
Other considerations arise when a limited company with power to increase its capital and possessing a fund of undivided profits, so deals with it that no part of its leaves the possession of the company, but the whole is applied in paying up new shares which are issued and allotted proportionately to the shareholders, who would have been entitled to receive the fund had it been, in fact, divided and paid away as dividend.
The result of such a dealing is obviously wholly different from the result of paying away the profits to the shareholders. In the latter case the amount of cash distributed disappears on both sides of the company's balance sheet. It is lost to the company. The fund of undistributed profits which has been divided ceases to figure among the company's liabilities; the cash necessary to provide the dividend is raised and paid away, the company's assets being reduced by that amount. In the former case the assets of the company remain undiminished, but on the
ATC 595
liabilities side of the balance sheet (although the total remains unchanged) the item representing undivided profits disappears, its place being taken by a corresponding increase of liability in respect of issued share capital. In other words, moneys which had been capable of division by the company as profits among its shareholders have ceased for all time to be so divisible, and can never be paid to the shareholders except upon a reduction of capital or in a winding up.''
28. (a) As I apprehend the reasoning in Wix, Mahon J. is stressing the passage from the advice of Viscount Dilhorne , Lord Diplock , Lord Edmund Davies and Sir Garfield Barwick as delivered by Lord Diplock in Europa Oil (Lord Wilberforce dissenting) that in revenue cases under the New Zealand (so also the Australian) statute, ``reality'' is directed only to the legal character of a payment, and not to its economic consequences; i.e. the concern is as to the true legal character upon an analysis of the contractual arrangements taken as a whole under which the payment was made - the legal effect, as distinct from economic consequences, or economic equivalent. Thereupon, Mahon J. is not questioning the validity of the tests as contained in the cases which are mentioned in para. 22(c) hereof, and in particular Mahon J., in referring to the ``substance approach'' is, for example, not questioning (in my understanding of Wix ) the passage cited from Caltex in para. 22(c)(v) hereof, or other cases cited in para. 22(c) hereof.
(b) See further the ``substance or reality of the whole relevant transaction'' as discussed by
Deane
J. in
Leary
v.
F.C. of T.
80 ATC 4438
at p. 4455
and the series of cases therein relied on.
(c) So also I do not read the remark of Gibbs J. in Curran (pp. 4303; 419) viz. ``these transactions which were in truth profitable'' as contraverting the passage in Caltex , or passages in the other cases which are cited in para. 22(d) hereof; for example, compare other phrases as used in Curran by Gibbs J., ``the only practicable way of reaching a true result'' (pp. 4304; 421) ``to arrive at a true estimate of the appellant's income'' (ibid.) ``misleading if it did not reflect in the account the benefit received'' (pp. 4304; 422) ``to enable the necessary comparison to be made'' (pp. 4305; 422) ``a result which appears to be distorted... no reason for falsely showing the shares to have had no value'' (pp. 4305; 422). The ``manifestly unreal'' argument, so also the ``real situation'' argument for the Commissioner in Curran as rejected by Gibbs J. (pp. 4303; 420) is not, in my understanding of Curran , the same subject which is crucial to the present transactions. The ``true result'' of the trading (ibid.) in Curran was dependent upon the appellant being the beneficial owner of all the shares (including bonus shares).
29. The partnership's schedule of purchases and sales indicates that on 28 June of the year in issue it purchased two parcels of shares in the first company mentioned aforesaid and one parcel of shares in the company secondly mentioned aforesaid and on the same day (apparently) received a bonus issue of shares from each of these companies and on the next day sold all shares so purchased and also all those bonus shares. However I find the facts of the matter to be set out in para. 30 hereof.
30. (a) On the ordinary civil standard of probabilities what occurred on or about 24 June 1977 (i.e. three or four or five days prior to 28/29 June 1977), is that all the undermentioned transfers of shares as in (b), (c), (d) and (e) hereof were prepared for execution pursuant to agreements which were certainly made at least by 24 June 1977, and more likely made late in May, or in the first, second or third week in June 1977 (and on the assumption of a valid increase of capital and a valid issue of fully paid bonus shares).
(b)(i) The then currently registered shareholder for 19 of the ordinary shares in the first mentioned company transfers the same to the partnership (or its nominee) for $1,291,905; (ii) the nominee then currently registered (on behalf of that same registered shareholder) for one such ordinary share transfers the same to nominees of the partnership for $67,995; (iii) that same registered shareholder with 250 preference shares transfers the same to the partnership (or its nominee) for $500. (Thus the current registered shareholder and its nominee transfer the entire holding of 20 ordinary shares and 250 preference shares in the first mentioned company for $1,360,400.)
ATC 596
(c)(i) The partnership transfers the said 19 ordinary shares in the first mentioned company to the ultimate shareholder for $62.18; (ii) the nominee holding for the partnership transfers one such ordinary share to a proprietary company (which more likely than not is a nominee of the ultimate shareholder) for $3.28; (iii) the partnership transfers 250 such preference shares to the ultimate shareholder for $500; (iv) the partnership transfers 399,570 bonus shares (derivable through the said 19 ordinary shares) to the ultimate purchaser for $1,293,505.88; (v) the partnership's nominee transfers 21,030 bonus shares (derivable through the remaining one ordinary share) to a proprietary company (which more likely than not is a nominee of the ultimate shareholder) for $68,079.26. (Thus the partnership and its nominees transfer the entire holding of 20 original shares, 250 preference shares and 420,600 derivable bonus shares, yet to be issued, to the ultimate purchaser (or to it and its probable nominee) for $1,362,150.60.)
(d)(i) The then two currently registered shareholders for 50,000 ordinary shares in the secondly mentioned company (46,840 and 3,160 respectively) transfer 49,000 such shares to the partnership for $249,410 ($233,325.60 and $16,084.40 respectively); (ii) one such registered shareholder transfers the remaining 1,000 ordinary shares to the nominee of the partnership for $5,090 (i.e. 50,000 ordinary shares transferred to the partnership or its nominee for $254,500).
(e)(i) The partnership transfers the said 49,000 ordinary shares in the secondly mentioned company to the ultimate shareholder for $97,469.86; (ii) the nominees of the partnership transfer 999 such shares to the ultimate shareholder for $1,987.19; the nominees of the partnership transfer the remaining one such share to the proprietary company, as in (c)(v) hereof (which more likely than not is a nominee of the ultimate shareholder) for $199; (iii) the partnership transfers 77,812 bonus shares (derivable through the said 49,000 ordinary shares) to the ultimate shareholder for $154,782.14; (iv) the nominees of the partnership transfer 1,588 bonus shares (derivable through the said 1,000 ordinary shares) to the ultimate shareholder for $3,158.82. (Thus the partnership and its nominees transfer the entire holding of 50,000 ordinary shares and 79,400 derivable bonus shares, yet to be issued, to the ultimate purchaser (or to it and its probable nominee) for $257,400).)
31. (a) A consequence of the findings of fact as in para. 14(a), (b) and (c) hereof is that I reject the Commissioner's submissions with respect to sec. 25(1) and sec. 26AAA.
(b) As to the error of not regarding the business as a whole see
Investment
&
Merchant Finance Corp. Ltd.
v.
F.C. of T.
71 ATC 4140
at p. 4142;
(1971) 125 C.L.R. 249
at p. 255
;
A.C. Williams
v.
F.C. of T.
72 ATC 4157
at pp. 4165-4167;
(1972) 128 C.L.R. 645
at pp. 652-654
.
(c) A sufficient commercial purpose is not the test for sec. 26(a) or sec. 52 or sec. 25(1). As to sec. 26(a) (so also sec. 52) importing a business element see
Steinberg
v.
F.C. of T.
75 ATC 4221
;
(1975) 50 A.L.J.R. 43
;
Gauci
v.
F.C. of T.
75 ATC 4257
; (1975) 50 A.L.J.R. 358
; as to a single transaction being a step in a business see
Fairway Estates Pty. Ltd.
v.
F.C. of T.
70 ATC 4061
;
(1970) 123 C.L.R. 153
;
Esquire Nominees Ltd. (as Trustee of Manolas Trust)
v.
F.C. of T.
73 ATC 4114
;
(1973) 129 C.L.R. 177
;
Re Gerald Cooper Chemicals Ltd.
(1978) 2 All E.R. 49
;
Brown
v.
Brook
(1971) 45 A.L.J.R. 400
per
Windeyer
J. at pp. 403-404;
F.C. of T.
v.
St. Hubert's Island Pty. Ltd.
78 ATC 4104
at pp. 4118 and 4124
.
(d) As to a business purpose not necessarily being a purpose of profit-making see
Rolls
v.
Miller
(1884) 27 Ch.D. 71
;
Town Investments Ltd.
v.
Department of the Environment
(1976) 1 W.L.R. 1126
at 1144
;
Commonwealth
v.
Reeve
(1949) 78 C.L.R. 410
;
Tweddle
v.
F.C. of T.
(1942) 7 A.T.D. 186
;
Cooney
v.
Ku-ring-gai Municipal Council
(1963) 37 A.L.J.R. 212
;
Commr. of Prices and Consumer Affairs (S.A.)
v.
C. Moore (Aust.) Ltd.
(1977) 51 A.L.J.R. 715
;
F.C. of T.
v.
McPhail
(1968) 117 C.L.R. 111
at pp. 115-116;
15 A.T.D. 16
.
(e) It is a matter of common knowledge that all transactions within a business are not necessarily intended to be profitable. It matters not whether the motive for setting out to incur a loss (or a break-even point) is advertising or luring customers into a store (as with ``loss leaders'' in a supermarket) or deception (as with recently outlawed ``mock'' auctions) those purposely non-
ATC 597
profitable transactions are nonetheless transactions within the business.(f) The cases which have been relied on by the Commissioner (
London Australia Investment Co. Ltd.
v.
F.C. of T.
77 ATC 4398
;
F.C. of T. v. St. Hubert's Island Pty. Ltd.
78 ATC 4104; and
A.C. Williams (supra))
do not appear to support the Commissioner's contentions re sec. 25(1), 26(a) and 26AAA.
32. (a) The Commissioner has relied in respect of each of the two companies as mentioned in para. 2 hereof on the unsatisfactory proof of meetings of directors, and of meetings of shareholders, and of resolutions at such meetings (if any such be proved) with a view to increase of nominal share capital and as to capitalisation of money in a capital reserve account and application of such money in paying up in full the issue of bonus shares; and also for the secondly mentioned company on the unsatisfactory proof of a declaration at a directors' meeting that a dividend be declared.
(b) The charge of unsatisfactory proof on the ordinary civil standard of probability is justified ( vide , for example, the non-production of the minute book of the other company, with minutes which are not contemporaneous; and the discrepancy between the document which was sent to the Commissioner for Corporate Affairs and the oral evidence which contradicts that document; and the conflict in oral evidence as to meetings held; and the casual nature of such meetings even where there is not such a conflict).
33. Regardless of why the questions were not raised in Curran (where the time interval was similar), the Commissioner contends (i) that the effect of the Companies Act is that neither the first or the secondly mentioned company aforesaid could validly make bonus share prior to the registration by the Commissioner for Corporate Affairs of the resolution for the increase of share capital. This submission rests upon the combination of sec. 18(1)(c), 21(3), 28(2), 62(1)(a) and 63 of the uniform Companies Act; more particularly, as the increase in share capital is dependent upon an alteration to the memorandum of association, it is (by sec. 21(3) thereof) that upon registration of the resolution ``and not before'' that the alteration of the memorandum, viz. the increase in share capital, ``shall take effect'' ; and (ii) that the bonus issue prior to registration (which occurred some time in or after August 1977) could not be validated except by order of the Supreme Court pursuant to the just and equitable provision in sec. 63 thereof; i.e. the allotment of bonus shares was invalid in limine and remained invalid in the absence of a Supreme Court order validating the issue; and thus neither the partnership nor the ultimate shareholder has ever obtained any title to the bonus share issue. That submission in my opinion is supported by the aforesaid provisions of the uniform Companies Act . The fact remains that there was a sale (per a conduit pipe) from the original shareholders respectively to the ultimate shareholder of parcels of issued shares with the prospect of bonus shares.
34. The witness for the taxpayers are accepted by me as being truthful, but their evidence was neither complete nor satisfactory, due largely to faulty memory, and the lack of contemporaneous notes such as a diary. This defect is particularly serious when (i) the burden of being the principal witness is cast upon one (the accountant/taxpayer) who in June 1977 was a young man who had not attained the status of partner in the accountants' firm (achieved in or about March 1978) and his diary notes had been lost; (ii) the principal of that firm of accountants (and one of the 20 partners in the subject share dealing partnership) who presumably supervised all the manoeuvres was not called as a witness, and no explanation was given for that failure; (iii) another young accountant (also one of the partnership of 20) as then employed by that firm of accountants contradicted in some material respects the evidence of the accountant/taxpayer (and for what it is worth I accept that other accountant's evidence); (iv) the solicitor who designated the steps to be taken in the manoeuvres was not called as a witness, and no explanation was given for that failure; (v) each of the two respective directors of the Curran type companies who did give evidence was vague in the extreme as to resolutions of his or her board or of his or her company and other such directors were not called as witnesses to
ATC 598
cure the deficiencies; (vi) not all records of such companies as should have been produced were produced and the defects were only attempted to be met by generalities; (vii) each such respective director was virtually completely ignorant of the manoeuvres which the firm of accountants was carrying out with the first and the secondly mentioned companies aforesaid. Whilst a Board of Review is not concerned with the conflict to which Brennan J. referred in Levy supra where a person who has the mantle of professional adviser undertakes entrepreneurial activities which concern the client's property, the instant references bring to mind an observation of Lord Buckmaster L.C. in delivering the judgment of the House of Lords in Cook v. G.S. Deeks and Ors . (1961) 1 A.C. 554 at p. 562:``In other words they intentionally concealed all circumstances relating to their negotiations until a point had been reached when the whole arrangement had been concluded in their own favour and there was no longer any real chance that there could be any interference with their plans. This means that while entrusted with the conduct of the affairs of the company they deliberately designed to exclude, and used their influence and position to exclude, the company whose interest it was their first duty to protect.''
The present relevance of that observation is restricted to the substance and reality of the two Curran type transactions; (viii) the person who controlled the ultimate shareholder (he being the stock broker in the said stock exchange transactions) was not called as a witness, and no explanation was given for that failure.
35(a) Whilst I accept that (i) during the relevant period in June 1977 the partnership was in a business of share traders and all 20 partners were involved in that business with its incident of two intended Curran type transactions (cf. Kowald supra ); (ii) the partnership was therefore able to produce accounts and book entries for share trading as well as for two apparent Curran type transactions; (iii) the partners carried out the motions of being registered as a shareholder in the first and in the secondly mentioned companies aforesaid (and for the moment leaving aside the crucial matters which are mentioned in para. 33 hereof).
(b) Nonetheless, the distinction between the facts as in Curran and the facts on these references is that (i) in Curran the appellant was conceded to be the beneficial owner of the transferred shares and of the bonus shares; (ii) in the present references, the partnership was a mere conduit pipe for the ultimate purchaser and the partnership was not in any real sense the beneficial owner at any time of the transferred shares or of the bonus shares.
(c) From the outset of the proposed transactions concerning shares in the first and secondly mentioned companies aforesaid, and before the partnership acquired any interest in shares in either of those companies, the partnership was fully committed to sell to the ultimate purchaser all such shares as were to be bought by the partnership and fully committed to transfer to the ultimate purchaser all such bonus shares as should issue.
(d) The accounts and book entries as aforesaid in the present reference are on the premise that the partnership was the beneficial owner of purchased shares and bonus shares, when in truth and substance it never was.
(e) The consequence is that the sections of the Act which were the foundation of the majority decision in Curran are not reached in the present reference.
(f) To express this subject in phrases which are contraverted from the aforesaid judgment of Barwick C.J. in Curran: the partners were not at any time beneficially the shareholders in either the first company as referred to in para. 2 hereof or in the second such company; the acceptance of the purported bonus shares (in terms of the resolution (if any) to issue bonus shares) was an acceptance by, or for and on behalf of, the said ultimate purchaser in transactions in which the partners played only a nominal role, i.e. as a conduit pipe through which the shares flowed from the existing shareholders (as at late May and until 28 or 29 June 1977) to the said ultimate purchasers (as at 28 or 29 June 1977); the recipient of the purported bonus shares, in truth and substance, was the said ultimate shareholder and not the
ATC 599
partners (except as a conduit pipe); the partners were not entitled to treat themselves as having paid the amounts credited as the cost of the purported bonus shares, because those amounts, in truth and substance, were paid by the said ultimate purchaser, with the partners being interposed, nominally, in the transactions; the pertinent provisions of sec. 44 are not presently applicable for the partners (and it is not an issue whether those provisions are relevant for the said ultimate purchaser); the partners' accounts, as in para. 6, 7 and 8 hereof, of their share dealings in June 1977, do not accurately reflect the result of share transactions in which the partners were involved in the first and secondly mentioned companies aforesaid, because the subject shares (including purported bonus shares) were not at any material time ``held'' by the partners, in the relevant sense of that word; the cost of acquiring the purported bonus shares (as well as cost of the shares from which purported bonus shares were derived) was a cost to the ultimate purchaser, and not a cost borne, in any real sense, by the partners.(g) The matter was substantially as put by the Commissioner's counsel: The partners had to finance this arrangement so that no balance of moneys was altered after the whole transaction was completed; the partners all stood exactly where they were ( scil. at the outset), and an essential ingredient was that a trading loss would result for the partners.
(h)(i) The matter was incorrectly stated by a witness (one of the partners) by inverting the order of events thus: I was involved in the transactions that took place in the acquisition by the partnership of two companies, and in the issue of the bonus shares by those companies, and the subsequent on-sale of those companies; (ii) that was incorrect, because although it might be said that there was a subsequent on-transfer of (shares in) those companies, the ``on-sale'' was a commitment from the outset and was not in any real sense ``subsequent'' to the purchase of shares by the partnership.
(i) So far as the partners were involved in the two Curran type transactions those transactions did not have the two distinct aspects which were referred to by Gibbs J. in Curran (p. 4304; 421).
(j) Whether or not it might be appropriate to speak of bonus shares being ``purchased'' ( Curran per Gibbs J. at p. 4304; 421) any such purchase was that of the ultimate shareholder; so also none of the subject shares (original or purported bonus issue) became the trading stock of the partners were committed to acquire all such shares with a view to transferring the same to the ultimate shareholder; and it is of no importance to look to the point of time at which the ultimate shareholder would be in a position to sue for specific performance. (The gain from acting as a conduit pipe for the ultimate shareholder is not a gain from trading in shares, but nonetheless the gain is assessable income as being an incident of a business.)
36. As on all taxation references the Commissioner is relieved by sec. 190(b) of the onus of proof (
Sutton
v.
F.C. of T.
(1959) 100 C.L.R. 518
at p. 523;
11 A.T.D. 499
at p. 502
). Of course that does not mean that the Commissioner may not find during the progress of the reference that the shifting evidential onus is on him; one such instance, as mentioned during addresses, is that if the taxpayer's witness deposes that a letter was posted in a receptacle for such articles, the Commissioner does not succeed in shifting the evidential onus from himself by getting admissions from the witness that the witness has or had a book which records the posting of articles and that the book has not been produced. The standard of proof is the civil standard of probability, i.e. that it is more likely than not that the assessment is excessive (
ibid;
see also
Danmark Pty. Ltd.
v.
F.C. of T.
;
Forestwood Pty. Ltd.
v.
F.C. of T.
(1944) 7 A.T.D. 333
at pp. 336, 337
; and generally as to the consequence of failure to call a material witness see
Jones
v.
Dunkel
(1959) 101 C.L.R. 298
at p. 321
as applied by
Gibbs
J. in
Jacob
v.
F.C. of T.
71 ATC 4192
at p. 4194;
(1971) 45 A.L.J.R. 568
at p. 570
;
R.
v.
Burdett
(1820) 106 E.R. 873
;
(1814-1823) All E.R. Rep. 80
per
Abbott
C.J.;
Wigmore on Evidence
3rd ed. vol. 2 sec. 285 p. 162). On a taxation reference if it appears that a taxpayer has withheld a material witness or otherwise has not exposed all the material facts, then (consequent upon sec. 190(b)) the position is not reached where as in
Martin
v.
F.C. of T.
(1953) 90 C.L.R. 470
at p. 495
it is simply a matter of looking to
ATC 600
the right conclusion to be drawn from the whole of the evidence, as occurs in ordinary civil actions: cf. Barwick C.J. in Gauci v. F.C. of T. 75 ATC 4257 at p. 4259; (1975) 135 C.L.R. 81 at p. 86, viz. ``The actual facts - apart from... were fully exposed''.37. In the instant references the taxpayers have not eliminated the hypothesis that the partners were not beneficially entitled to any of the subject shares (original and purported bonus issue); nor have the taxpayers disposed of the further hypothesis that from the outset they were only a conduit pipe for the shares to flow to the ultimate shareholder: cf.
General Motors-Holden's Pty. Ltd.
v.
Bowling
(1977) 51 A.L.J.R. 235
as applied in
Macmine Pty. Ltd.
v.
F.C. of T.
79 ATC 4133
at p. 4157;
(1979) 53 A.L.J.R. 362
at p. 379
viz:
``(the section) imposed the onus on the appellant of establishing affirmatively that it was not actuated by the reason alleged... The consequence was that the respondent, in order to succeed, was not bound to adduce evidence that the appellant was actuated by that reason, a matter peculiarly within the knowledge of the appellant. The respondent was entitled to succeed if the evidence was consistent with the hypothesis that the appellant was so actuated and that hypothesis was not displaced by the appellant. To hold that, despite the subsection, there is some requirement that the prosecutor brings evidence of this fact is to make an implication which... is unwarranted and which is at variance with the plain purpose of the provision in throwing on to the defendant the onus of proving that which lies peculiarly within his own knowledge.''
38. The result is that the taxpayers have failed on the major issue, but have proved that the Commissioner's assessments are on a wrong basis; and the correct result is that the partnership's profit for the year ended 30 June 1977 was $969 (para. 6(a) hereof) whereby the proportion to be carried into the assessable income of the proprietary company/taxpayer is 1200/20000 of $969 viz. $58; so also for the medical specialist/taxpayer; and for the accountant/taxpayer the proportion 400/20000 of $969 viz. $19 (disregarding cents in each instance).
39. I would hold that each respective decision on the several objections was in error to the extent set out in para. 38 hereof and I would amend the respective assessments accordingly.
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